This is not a surprise to regular readers of this blog. They know that the Nyberg Report on the Irish Financial Crisis documented exactly the same type of behavior by Irish bank regulators.
Furthermore, regular readers know that the only way to prevent this type of behavior from recurring is to require banks to provide ultra transparency. The means banks need to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.
If this type of disclosure is not required, then market participants have to rely on the regulators and trust that they will not let this sort of thing happen again.
The problem with trusting the regulators is that the lesson of the need for ultra transparency was painfully learned at the time of the Great Depression and subsequently forgotten by regulators.
It is simply unacceptable to ever put the stability of the financial system at risk again based on the regulators' promise not to forget next time. As the old adage goes: fool me once, shame on you; fool me twice, shame on me.
You are the head of the Financial Services Authority, Britain’s all-powerful financial regulator, but the chief executive of your largest bank is treating you with disdain.
You decide to send his bosses - the board - a letter warning them of your concerns about the way the business is being run.
But, before you send the letter to the board, you flip it over to the chief executive in question for his approval and guess what, he proposes a couple of tweaks.
Out goes the letter, but removed are your warnings about the deteriorating relationship between yourself and the chief executive and your concerns about the bank’s risky corporate lending.
Impossible? No. This is what happened to the ARROW letter (a warning note sent by the regulator to firms it has concerns with) sent by the FSA to RBS in 2005. The chief executive in question was, of course, Sir Fred Goodwin.
But it does not end there. Before the letter, RBS had already repeatedly blocked requests from the regulator for one-on-one meetings with RBS non-executive directors and become “resistant” to requests from the FSA for information.
Such was the “pushback” from the bank, it was not until the lender was rescued from collapse by the taxpayer that regulators had full access to its “board pack” of detailed financial information on the state of the business.
It is well-known how Sir Fred bullied and cajoled RBS staff, but it beggars belief the way he and his staff were able to boss around the FSA.
Even the bank realised this was not a healthy situation, and we learn that in 2006, then-RBS chairman Sir George Mathewson made improving the bank’s relationship with the FSA a formal part of Sir Fred’s annual performance review....
Looking at the way the FSA handled RBS up until it collapse in October 2008 is to observe a world that now seems entirely alien.
The regulator notes that Johnny Cameron, the former chairman of RBS’s investment banking arm, was “not considered a true markets person” and would not be allowed to run that business today.
Time and again, however, we see the FSA identifying a problem at the bank and not having the courage of its convictions to take on an institution that was viewed with a mixture of fear and awe.
Seen in this context, the FSA’s green-lighting of RBS’s highly risky acquisition of Dutch financial group ABN Amro was merely the continuation of a well-established trend.
While calling for stronger powers today, the FSA admits it could have “used other mechanisms” to block the deal back in 2007.
Perhaps, the reason it did not was that it simply had no idea how much of a gamble the takeover was. One amazing nugget buried in today's report is the revelation the FSA had just six staff focusing on RBS in August 2007 - the height of the bank’s battle to buy ABN – compared to more than 20 today.Excuse me, but 20 staff members today pales in comparison to how many individuals and companies would be assessing the risk of RBS if it was required to provide ultra transparency.
There is simply no way that the 20 staff members can match the analytical firepower of the market.
Furthermore, while bank executives might stand up to their regulator, they cannot stand up to the market. Whether the bank executive likes it or not, with ultra transparency they will be subject to market discipline 24/7/365.
RBS’s failure was not then just the result of “poor decisions” by RBS managers as the FSA heads its press release this morning, but the inevitable consequence of an astounding meekness at the FSA to discipline its unruly charge.
If the report serves any purpose, it should be to catalogue the frankly astonishing relationship between one of Britain’s largest banks and those charged with ensuring it behaved correctly.Like the Nyberg Report on the Irish Banking Crisis, the FSA Report catalogues the need for banks to be required to provide ultra transparency.
Future and current regulators reading this document cannot be any doubt that their duty is to the public, not over-mighty bankers.As this blog has mentioned countless times when discussing the FDR Framework, the regulators duty is to ensure that market participants have access to all the useful, relevant information in an appropriate, timely manner.
For banks, this means requiring them to provide ultra transparency.